July 29, 2010
13. Healthy Foods, Inc., sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the grapes are $.10 per pound. a. What is the break-even point in bags? 80,000/5= 16,000 bags- This is the company's break-even point because the variable per unit would be $5.00 if it's .10 per pound with a 50-lb bag. The other answer I received was 8,080 bags but this would be inaccurate.
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags. At 12,000 bags the loss would be $20,000 and at 25,000 bags the profit would be 45,000 c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases? At 20,000 bags the DOL is 5% and at 25,000 bags the DOL is 2.8 %. The degree of operating leverage changes because the operating income increases.
d. If Healthy Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. The EBIT at 20,000 bags is 20,000 as worked out in part b. So, calculate: (20,000)/ (20,000-10,000) to get a DFL at 2 times. The EBIT at 25,000 bags is 45,000 as worked out in part b. Calculate: (45,000)/ (45,000 - 10,000) to get a DFL at 1.29 times.
e. What is the degree of combined leverage at both sales levels? Find the DCL at 20,000 bags by multiplying 20,000 x (10 - 5) and dividing by (20,000 * (10 - 5) - 80,000 - 10,000) to get 10 times. Find the DCL at 25,000 bags by multiplying 25,000 * (10 - 5) and dividing by (25,000 * (10 - 5) - 80,000 - 10,000) to get 3.57 times